Making the most of sunshine
Imagine taking a financial position where you have to bet on the rupee devaluing against the dollar, increasing oil prices and inefficiency of the government. This is precisely the position a solar rooftop customer in Pakistan finds himself taking these days.
Consider the loaded grid tariffs (including taxes, surcharges, fuel price adjustment) of a residential connection in the Lahore Electric Supply Company (Lesco) system. The loaded peak tariff went from Rs24.51 per unit in July 2018 to Rs31.09 per unit in March 2019, depicting a 27 per cent increase over eight months.
Moreover, this increase was about 130pc when compared to the loaded peak tariff in March 2018. Much of this increase has been on account of fuel price adjustment (a function of dollar rate, imported oil price and energy mix) but also because effective 1st January 2019, the base tariff was revised upwards by around 50pc.
Coming summers, with further currency devaluation and higher imported-fuel based power generation expected, the tariffs will rise further.
And yet all of this actually helps a solar customer because he remains immune to such tariff escalation. Moreover, thanks to net or reverse metering (where he can sell excess electricity back to the grid) he can actually earn from such inflation in grid tariffs. This disruption is here courtesy solar technology.
Solar technology, much like perhaps all the technologies, has gone through rapid and exponential changes. The price of a solar photovoltaic (PV) panel has gone down from $76.7 per watt in 1977 to about $0.20 per watt today.
This is a phenomenon explained by Swanson’s Law that states that price of solar PV cells tends to drop 20pc with every doubling of cumulative shipped volumes. This learning curve of solar manufacturing has only made solar PVs more affordable.
As opposed to grid-scale solar plants, rooftop solar systems save approximately 15-20pc in transmission/distribution losses
Pakistan is blessed with high solar irradiance (solar power per unit of area) and ample rooftop space. Solar rooftop customers here today enjoy a much better payback on their investment than they did a few years back.
Between 2014 and 2018, the fall in present value prices in dollar terms was considerably higher than rupee devaluation against the importing currency. These factors, coupled with galloping tariff rates, can make an investment in rooftop solar payback within 5years.
That being said, solar energy, much like all renewables, is inherently intermittent. You just can’t have solar power at night. This intermittence makes it both expensive and unreliable for grids’ base loads.
In case of solar, this causes another problem to grid managers called the Duck Curve. Duck Curve is the graphical representation of power production over the course of a day that shows the timing mismatch of consumption and solar power generation.
Typically for grids, power consumption increases early morning for a brief period, experiences a trough during day time then peaks again in evening hours before going down during night.
Now with solar power in the mix, the solar production peaks mid-day which makes the day time trough of grid load more pronounced leaving grid managers with excess power supply in day time and a deficit (requiring expensive peaker thermal plants to operate) in the evening.
The most effective solution to this generation-consumption mismatch lies in energy storage. An efficient, reliable and cheap energy storage system remains elusive and forms the weakest link in the whole solar chain.
This, however, changed recently. In March 2017, the island of Kauai in Hawaii got a 52MWh battery storage solution from Tesla installed at its existing 13mega watt peak (MWp) solar farm. Serving about 30,000 customers on this remote island, the batteries will be replacing diesel-fired generators during night time that would reduce the use of fossil fuels by 1.6 million gallons per annum. And all of this at a unit cost one-third of diesel-powered electricity.
Tesla used the lithium-ion battery technology for this solution. The lithium-ion (li-ion) technology not only boasts grid-scale application but has also brought in residential/commercial consumption to its fold.
The manufacturing of lithium-ion batteries has seen explosive growth since 2010. Driven earlier by consumer electronics (smartphones, laptops, tablets etc), the automotive sector (electric vehicles) is now the dominant user of li-ion based energy storage technologies.
Similarly, given its distinct advantages over traditional batteries, li-ion has become the battery technology of choice in stationary storage solutions (like PV and grid storage) as well. Compared to conventional lead-acid batteries, the lithium-ion batteries have up to 80pc higher usable capacity, up to 70pc better efficiency (lower energy losses), 2-4 times higher energy density (energy stored per kilogram), and 4-5 times longer cycle life.
Lastly, thanks to large manufacturing capacities, the battery cell prices have seen a steep decline — 19pc per annum between 2010 and 2016 – making them reasonably affordable. Therefore, for solar PV systems requiring storage at home or in offices, li-ion batteries have become really a no brainer.
The suitability of distributed solar for Pakistan’s energy mix is hard to overstate. Solar power is good for lungs, it causes our carbon footprint to shrink, offsets our future import of fossil fuels, conserves valuable foreign exchange and has the lowest dollar cost per unit of energy today.
Moreover, as opposed to grid-scale solar PV plants, roof-top solar systems generate power where it is consumed, saving approximately 15-20pc in transmission/distribution losses. And they require no sovereign guarantees from the government either.
And yet, despite all the good intentions and efforts by the government, as evident by various incentives offered for solar adoption, the offtake has been quite slow.
Major reasons for these include a general aversion of our people to adopt new technology, bad experience with cheaper/poor quality systems offered by unreliable vendors and, most importantly, lack of financing options for solar customers to make the high upfront investment.
Therefore, in order to truly harness solar potential on rooftops, government will have to push banks for solar consumer financing and streamline existing power distribution infrastructure. Until that happens, only a fortunate few will stand to benefit from this technological disruption called rooftop solar.
The writer heads the business advisory function at a large industrial and services group in Islamabad
Published in Dawn, The Business and Finance Weekly, May 6th, 2019
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ISLAMABAD: A couple of weeks ago, we discussed in this space, the issue of spot vs long-term liquefied natural gas (LNG) contracts. In the following, we will highlight the emerging international LNG market.
Global LNG trade grew 6.4% in 2018 value at $150 billion. The market is getting competitive. There are already 20 countries supplying LNG which included Qatar, Australia, Malaysia, Russia, the US, Nigeria, Indonesia, Algeria, Egypt, and others.
A lot of capital expenditure is coming. Saudi Arabia is a new entrant while Oman and the UAE are already in the market, apart from Qatar. LNG prices have shown some volatility in recent years – these were at $15-20 per million British thermal units (MMBtu) in 2014, came down to $5 in 2017, rose to $10 in 2018 and are now trading around $5, both in Asia as well as Europe. The normal ratio between LNG and crude oil prices has traditionally been 80% and predictions are being made that the ratio may go down to 50% due to an LNG supply glut.
It appears that term contracts are risky although spot purchases have non-price risks. According to the IGU Report, out of global LNG trade of 316 million tons per annum (MTPA) in 2018, only 99 MTPA was contracted as non-term (32% of the total).
LNG suppliers prefer to have long-term oil-indexed contracts of 20-25 years, seeking price stability and visibility to ensure required investments. However, LNG spots are better indicators of supply and demand and this trend has been growing constantly.
Gas-linked contracts are originating from the US where LNG contracts are linked with the Henry Hub Index (HHI). Normal terms are 1.15 times of Henry Hub price plus liquefaction and transportation costs.
India’s 60% of supplies are coming under oil-linked contracts and 40% is based on gas-linked contracts, the latter coming mainly from the US. As China has superseded Japan as the largest LNG importer, Australia has superseded Qatar as the largest LNG exporter. It is being predicted that in a few years the US would become the largest LNG exporter due to being the lowest cost producer because of its cheapest shale resources.
Australia has been offering more flexible contracts while Qatar has stuck to the earlier day’s restrictive practices such as destination restrictions. Qatar Gas companies are reportedly under investigation by European regulators for their restrictive practices contrary to the cardinal principles of open competition.
Pakistan
Pakistan has three-term contracts with Rasgas of Qatar, Gunvor of Switzerland and Eni of Italy. The contract with Rasgas was a negotiated contract which sparked a lot of controversies. The government of the time claimed that its Qatar contract terms and prices were compatible with Qatar contracts with India and Bangladesh, which was demonstrably correct.
Later, two other LNG contracts were signed with Eni and Gunvor as a result of open bidding at quite reduced prices of 12.29% and 11.6427% of Brent crude (of the average of last three months) respectively.
These low prices caused further controversy. LNG was also procured in spot markets with a slope varying between 9.2% and 16%. At current crude oil prices of $70 per barrel, Pakistan-Qatar term contract prices at the 13.37% slope would come out to be $9.35, Eni at $8.82 (12.3%) and Gunvor at $8 (11.6427%). However, spot prices rise in winter, but these are not expected to rise by 100%.
Most countries renegotiated LNG term contracts in 2015 and it appears that another round of renegotiations is around the corner. The Pakistan Tehreek-e-Insaf (PTI) government has requested, if not demanded, price revision from Qatar in the wake of much lower market prices offered and contracted for with Eni and Gunvor.
According to the contract terms with Qatar, price openers can be done after 10 years. Pakistan wants it after five years, if not an outright revision shortly. However, increased supplies of 200 mmcfd have been agreed to recently by Qatar at 20% lesser prices along with some better credit terms.
